When I was in middle school, my mom showed me a paper she had copied out of a magazine years before. There wasn’t a lot of content on the page, just a simple title, a brief story, and a chart. Something like this:

How to Become a Millionaire

If Jane invests $2,000 a year for eight years in her twenties, in an account that earns 12% interest, her $16,000 investment will be worth over $1 million dollars when she turns 60.

Age

Contribution

Ending Balance

20

2,000.00

2,235

21

2,000.00

4,734

22

2,000.00

7,526

23

2,000.00

10,646

24

2,000.00

14,134

25

2,000.00

18,032

26

2,000.00

22,389

27

2,000.00

27,259

28-59

0.00

. . .

60

0.00

1,070,457

I was astounded. (And, of course, wanted to try this savings plan for myself.)

Why Aren’t There More Millionaires?

Most people would rather spend their money on fun things now than save for a fun future that seems far off

Setting the impracticalities (and human nature) aside, we can still learn something from this chart about the power of compounding and how to develop a savings plan.

A More Likely Plan

First, let’s take a look at the savings plan above under more realistic circumstances. I’ve recreated the chart above with a 7% interest rate and stretched it out to age 65. Here’s what we get:

Age

Contribution

Ending Balance

20

2,000

2,136

21

2,000

4,416

22

2,000

6,850

23

2,000

9,450

24

2,000

12,226

25

2,000

15,190

26

2,000

18,354

27

2,000

21,733

28-64

0.00

. . .

65

0.00

262,432

With these assumptions, our total investment of $16k will be worth about $262k at age 65. That’s pretty awesome, but we’re nowhere close to being millionaires.

Plus, it still assumes we are investing $2,000 a year at a time when the majority of us are living off of student loans. Let’s try again.

A More Realistic Plan

This plan is a little more complicated, but I think it’s more attainable for the average person.

Say we scrimp and save through college and use some of that cash from graduation gifts to invest $1,000 in a retirement account the year we graduate.

The next year, we’re teaching full time and earning $35,000. Financial advisors recommend setting aside 10-15% of your income for retirement, which would be $3,500-$5,250. Let’s take the lower end of that range and say we make a $3,500 investment our first year out of college.

Then let’s assume our income increases in subsequent years and we increase our annual contributions by $1,000 each year until we are making the maximum annual contribution (currently $5,500 for IRAs) until age 27.

Now the chart looks like this:

Age

Contribution

Ending Balance

20

0

0

21

0

0

22

1,000

1,068

23

3,500

4,877

24

4,500

10,013

25

5,500

16,564

26

5,500

23,558

27

5,500

31,027

28-64

0

. . .

65

0

374,657

Our total investment is $25,500 and the estimated value at 65 is just under $375k. Better, but still far from millionaire status.

Millionaire Savings Plan

I think it’s safe to say it’s very hard to become a millionaire, just by investments made in your 20’s. Take a look at what happens when we keep saving into our 40’s.

If we follow the plan from above and keep investing the maximum until we’re 41 and then don’t invest another penny, the chart looks like this:

Age

Contribution

Ending Balance

20

0

0

21

0

0

22

1,000

1,068

23

3,500

4,877

24

4,500

10,013

25

5,500

16,564

26

5,500

23,558

27

5,500

31,027

28

5,500

39,002

29

5,500

47,517

30

5,500

56,609

31

5,500

66,317

32

5,500

76,683

33

5,500

87,751

34

5,500

99,569

35

5,500

112,188

36

5,500

125,662

37

5,500

140,049

38

5,500

155,410

39

5,500

171,812

40

5,500

189,326

41

5,500

208,026

42-64

0

. . .

65

0

1,003,265

We will have invested a total of $102,500 and at age 65, that investment will be worth $1,003,265.

BOOM. We’re millionaires! Congrats!

This is not magic. It’s compounding at work.

With time on our side and a disciplined savings plan, I really believe most people who are making a livable wage (yes, even music teachers) can plan to become millionaires.

But let’s not stop there. There’s more we can learn (and earn).

Another Lesson

By the time we’re 41, we’re in the habit of saving so we keep investing $5,500 a year until we’re 65. We will have invested a total of $234,500 and our portfolio will be worth about $1.33 million.

Not too shabby, but remember that the $102,500 we saved in our 20’s and 30’s was worth $1 million.

The additional $134,500 we saved in our 40’s, 50’s, and 60’s is is only worth about $330,000.

This is certainly not meant to deter you from saving in your 40’s and 50’s ($330k from a $134k investment is still a great return!), but to emphasize how incredibly valuable those early years are in the long-term value of your money. Time truly is our greatest asset.

But I Don’t Want to be a Millionaire

I wrote this post not because I think everyone should aspire to be “wealthy,” but because I think most of us aspire to be prepared. Believe it or not, with inflation, most of us in our 20’s and 30’s right now will need to be millionaires in order to maintain our current lifestyles in retirement. Crazy, right?

I also want to vanquish the idea that you have you have to win the lottery or create the next Facebook in order to become a millionaire. It’s not magic or luck or uncanny business acumen that produces these numbers, it’s math and a disciplined savings plan.

(If there’s any group of people who understands discipline and long-term pursuits, it’s musicians!)

They say the best time to plant a tree is 20 years ago and the second best time is today. The same could be said for retirement savings. Let’s get more millionaire music teachers!